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S.R.O. 146(1)/74, dated 7th February, 1974. - Whereas the annexed PROTOCOL amending the convention of August 7th, 1958, between the Government of Pakistan and the Government of Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income has been made.

Now, THEREFORE, in exercise of the powers conferred by Section 49AA of the Income-tax Act, 1922 (XI of 1922), the Federal Government is pleased to direct that all the provisions of the said PROTOCOL shall be given effect to in Pakistan.

Annex

PROTOCOL

Amending the Convention of August 7th, 1958,
Between the Federal Republic of Germany and the Islamic Republic of Pakistan
for the avoidance of double taxation and the prevention of fiscal evasion
with respect to taxes on income.

The Federal Republic of Germany and Pakistan

DESIRING to make certain modifications in the text of the Convention between the Federal Republic of Germany and the Islamic Republic of Pakistan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income, signed on August 7th, 1958.

HAVE AGREED AS FOLLOWS:
ARTICLE I

1. Article I of the Convention shall be deleted and replaced by the following Article I.

"(1) The taxes which are the subject of this Convention are

(a) in Pakistan the income-tax, and the supper-tax (hereinafter referred to as Pakistan Tax); and

(b) in the Federal Republic the Einkommensteuer (Income-tax), and the Korperschaftsteuer (Corporation Tax) (hereinafter referred to as Federal Republic Tax).

(2) The present Convention shall also apply to any other taxes of a substantially similar character imposed in Pakistan or in the Federal Republic of Germany subsequently to the date of signature of this Convention.

(3) In the case of substantial changes in the system of taxation of either Contracting State, the contracting States shall consult each other with a view to adapting this Convention to such changes.

2. Article VI of the Convention shall be deleted and replaced by the following Article VI.

(1) The rate of Pakistan super-tax on dividends paid to a Federal Republic company by a Pakistan company shall not exceed.

(a) 10 per cent when such dividends are derived from the income of an industrial enterprise, and

(b) 20 per cent in the case of dividends derived from other income:

Provided that the said Federal Republic Company owns not less than one-third of the voting shares of the Pakistani company.

(2) The provisions of section 23A of the Income-tax Act, 1922, (XI of 1922) relating to the distribution of company profits shall not apply to the income of a Pakistan company not less than one-third of the voting shares of which are owned by a Federal Republic company if the Pakistan company is engaged in an industrial enterprise and its profits are retained for purposes of its industrial development and expansion in Pakistan.

(3) The rate of Federal Republic tax on dividends paid to a Pakistan company by a Federal Republic company not less than one-third of the voting shares of which are owned by the former company shall not exceed 15 per cent.

(4) Where a company which is a resident of one of the territories derives profits or income from sources within the other territory there shall not be imposed in that other territory any form of taxation on dividends paid by the company to a person not resident in that other territory, unless such dividend is attributable to a permanent establishment maintained. in other territory by a person not resident in that other territory or any tax in the nature of an undistributed profits tax on undistributed profits of the company.

(5) The term "industrial enterprise" as used in this Article means an undertaking set up or commenced in Pakistan on or after the 14th day of

August, 1947 and which is

(a) "engaged in

(aa) the manufacture of goods or materials or the subjection of goods and materials to any process which substantially changes their original condition.

(bb) ship-building.

(cc) generation, transformation, conversion, transmission or distribution of electrical energy or the supply of hydraulic power;

(dd) the working of any mine, oil well or other source of mineral deposits (not being undertakings to which the second and third schedules to the Income-tax Act, 1922, apply), or

(b) any other undertaking which may be declared to be an industrial undertaking by the competent authority of Pakistan for the purposes of this Article."

3. Article VII of the Convention shall be deleted and replaced by the following Article VII.

ARTICLE VII

(1) Interest (including income from bonds, securities, notes, debentures, or any other form of indebtedness whether or not secured by mortgages) paid to a resident of one of the territories by a resident of the other territory shall not be taxed in that other territory at a rate exceeding 20 per cent unless the resident of the first-mentioned territory has a permanent establishment in the other territory and such interest is attributable to that permanent establishment.

(2) Notwithstanding the provisions of paragraph (1) of this Article, interest paid to a resident of the Federal Republic on approved loans (including .loans in the form of deferred payments) made to a Pakistan enterprise shall be exempt from the Pakistan tax payable thereon unless that resident has a permanent establishment in Pakistan and such interest is attributable to that permanent establishment. The term 'approved loan' means a loan approved by the Government of Pakistan.

(3) The State Bank of Pakistan shall be exempt from Federal Republic tax with respect to interest from sources within the Federal Republic.

(4) The 'Deutsche Bundesbank' shall be exempt from Pakistan tax with respect to interest from sources within Pakistan.

(5) The Government of one of the contracting States (including the provincial Governments in Pakistan and the Governments of the 'Lander' in the Federal Republic) and any financial institution owned by the said Government shall be exempt from tax in the other States with respect to interest from sources with the territory of the States.

4. Clause (c) of paragraph (1) of Article XIII of the Convention shall be deleted and replaced by the following clause:

"(c) as the recipient of a grant, allowance or award for the primary purpose of study or research from a religious, charitable, scientific or educational organisation".

5. Article XIV of the Convention shall be deleted and replaced by the following Article XIV;

ARTICLE XlV

(1) The laws in force in either of the territories will continue to govern the assessment and taxation of income in the respective territories except where express provision to the contrary is made in this Convention.

(2) Subject to the provisions of paragraph (1) of this Article, Federal Republic tax payable, whether directly or by deduction, by a person resident .in Pakistan, in respect of income from sources within the Federal Republic (including income accruing or arising in the Federal Republic but deemed under the provisions of the laws of Pakistan, to accrue or arise in Pakistan) shall be allowed as a credit against any Pakistan tax payable in respect of that income.

(3) Subject to the provisions of paragraph (1) of this Article, the Federal Republic tax shall be determined in the case of a resident of the Federal Republic as follows:

(a) In cases other than those to which the provisions of sub-paragraph (b) of this paragraph apply, there shall be excluded from the basis upon which Federal Republic tax is imposed, any item of income from sources within Pakistan, which according to this Convention is not exempt from Pakistan tax.

The Federal Republic, however, retains the right to take into account in the determination of its rate of tax the items of income so excluded. In the case of dividends derived by a Federal Republic company from a Pakistan company, the exclusion mentioned in the first sentence of this sub-paragraph shall operate only when the Federal Republic company owns not less than ^[*] 25 per cent of the voting shares of the Pakistan company.

(b) Pakistan tax payable under the laws of Pakistan and in accordance with this Convention on the following items of income shall be allowed as a credit against Federal Republic tax payable in respect thereof as indicated below:

(aa) In the case of dividends received by a Federal Republic company from a Pakistan company when the former company owns less than 25 per cent of the voting shares of the latter company; the Pakistan super-tax paid on such dividends;

(bb) In the case of dividends received by a resident of the Federal Republic other than a Federal Republic company: the Pakistan tax paid by that resident in respect of such dividends;

(cc) In the case of interest to which paragraph (1) of Article VII applies: the Pakistan tax paid on such interest;

(dd) In the case of interest exempted under the provisions of the paragraph (2) of Article VII: an amount equal to one-half of the Federal Republic tax payable in respect thereof but not less than 20 per cent of such interest:

Provided that the credit shall not exceed the Pakistan tax which would have been payable if the exemption given under paragraph (2) of Article VII had not been granted;

(ee) In the case of remuneration including pensions paid out of public funds of Pakistan or a political sub-division thereof not being exempt from Federal Republic tax under Article X: the Pakistan tax paid in respect thereof.

(c) In the case of dividends mentioned in sub-paragraph (a) of this paragraph the exclusion shall operate only in respect of such dividends as are paid by a Pakistan company which derives its income exclusively or almost exclusively from an industrial enterprise, from selling goods or merchandise, rendering services or doing banking or insurance business, or from dividends paid by another Pakistan company which itself derives its income exclusively or almost exclusively from a industrial enterprise, from selling goods or merchandise, rendering services or doing banking or insurance business."

6. In clause (a) of Article XXIV of the Convention, the words "or the 'changeable accounting periods'" shall be omitted.

ARTICLE II

This Protocol shall apply to Land Berlin, provided that the Government of the Federal Republic of Germany has not delivered contrary declaration to the Government of Pakistan within three months from the date of entry into force of his Protocol.

ARTICLE III

1. This Protocol shall be ratified and the instruments of ratification shall be exchanged in Karachi as soon as possible.

2. (a) This Protocol shall come into force after the expiration of one month following the date on which the instruments of ratification are exchanged and shall thereupon have effect:

(aa) in Pakistan, in respect of the "previous years" (as defined by the tax laws of Pakistan) beginning on or after the 1st day of January in the calendar year in which such exchange takes place, and

(bb) in the Federal Republic, for the calendar year beginning on or after the 1st day of January in the calendar year in which such exchange takes place.

(b) The limitation of the rate of tax mentioned in paragraph (1) of Article VII of the Convention and the exemption from tax mentioned in paragraph (2) of the said Article and the provisions of sub-paragraphs (b) (cc) and (dd) of paragraph (3) of Article XIV of the Convention shall operate only in respect of interest from loans made on or after the date on which this (b) Protocol comes into force.

ARTICLE IV

The Protocol shall form an integral part of the Convention of August 7th, 1958, remains effective.

2. The competent authorities of the contracting States are hereby authorised to publish the text of the Convention, as modified by this Protocol after this Protocol comes into force.

DONE at Bonn on 27th August, 1963 duplicate in the German and English languages, both texts being equally authentic.

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